Dollar sentiment was neutral (USD/EUR) to modestly positive yesterday in the run-up to the US CPI release. CPI was exactly as expected. However, the market reaction was disturbed by President Trump firing Secretary of State Tillerson. Markets hesitated, but sentiment turned risk-off. US yields, equities and the dollar all declined. This was both due to a soft interpretation of the CPI and as a reaction to US political tensions. EUR/USD closed the session at 1.2390. USD/JPY reversed a big part of the intraday rebound and finished at 106.58.
Chinese eco data (retail sales, production, Fixed assets investments) were OK overnight, but insufficient to balance the negative spill-over effects from the US. Core yields are holding near yesterday’s lows. The dollar remains in the defensive. EUR/USD hovers in the 1.24 area. USD/JPY is changing hands in the 106.50 area. For now, the moves both in equities and on the FX market still develop in an orderly way.
US retail sales and PPI take center stage today. Markets will also keep a close eye on a conference in Frankfurt. Several ECB board members, including President Draghi, are scheduled to speak. US retail sales are expected to rebound after a poor January reading. Base effects might also be supportive for the PPI data. We see a good chance for both series to meet or even exceed the consensus. Question is whether this will be enough to counterbalance the US political noise. In Frankfurt, we expect the ECB to confirm a gradual approach on policy normalization. If Draghi and Co back the scenario of a gradual scaling back of APP beyond September, it should in theory be a euro negative. Yesterday, US political risk was the dominant factor for USD trading. Eco data and ECB talk might be EUR/USD negative, but it is far from sure that it will change fortunes for the dollar. We expect more nervous EUR/USD trading near current levels. A break beyond intermediate resistance at 1.2450 would open the way for a retest of the 1.2550/1.26 area. A break of the 1.2155 support looks difficult short-term.
Yesterday, sterling initially traded with a cautious upward bias as the half year budget update contained some cautiously positive news. However, in the end EUR/GBP closed little changed. There are again no UK eco data today. A global risk-off sentiment is no help for sterling. So EUR/GBP might hold close to or even return north of 0.89.
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